During the early modern period, Asia ran a large current account surplus with Europe. We show that the critical factor to stimulate Euro-Asian trade was not the new trading routes to Asia, but the European access to American precious metals. We use a dynamic general equilibrium model to reproduce historical data and calculate alternative scenarios. We find that European imports of Asian goods were up to thirteen times higher than they would have been without new routes and without precious metals. The effect of American precious metals is six times larger than that of the discoveries of new trading routes.

90% of the European imports of porcelain, silk, tea, and other luxuries from Asia during the early modern period were paid for in silver. The traditional and still currently accepted explanation by most historians for this imbalance of early modern Euro-Asian trade relies on cultural factors. It is said that Asians have always had a penchant for hoarding treasure (this is the view of Hamilton, Keynes, Kindleberger, and Maddison). By contrast, our explanation for the patterns of Euro-Asian trade in the early modern period does not rely on different preferences for Asians. Instead, the observed trade patterns emerge as a natural consequence of rational agents taking decisions in a dynamic general equilibrium context.

Our model of international trade has two “countries”, two goods and money. The demand for money is obtained with a money-in-utility specification. The two agents, denoted Europe and Asia, have identical preferences. Each agent produces a domestic good. All of the silver windfall is given to the European agent. There are also transaction costs, which apply to international transactions only.

We feed the historical data to the model. The windfall is given to the European agent. From 1500 to 1800, 85% of the worlds silver and over 70% of worlds gold came from America. The following figure (taken from Figure 4 in the paper) shows, in blue, the annual amount of “discoveries” of precious metals in America during 1531-1810, expressed in grams of silver per capita. In red, in shows our counterfactual: a world where new routes to Asia were found, but no precious metals existed in America.

The following figures (also taken from Figure 4 in the paper) then decouple the results of the historical and counterfactual scenarios for consumption and trade between Europe and Asia. In this one we can see that thanks to the new routes and the precious metals (mainly silver), European consumption of Asian goods was about 13 times what it would have been by the second quarter of the seventeenth century. However, most of that effect was due to the availability of American precious metals and not to the new trade routes themselves (note that two new routes to Asia were found, one through the Cape of Good Hope and the other through the Pacific). The new routes (and its associated technical and organizational change) would have at most doubled the previous trade levels.

Not only did the new routes have a much smaller economic impact on trade than did American precious metals, but the sign of their effect on trade patters was also different. This is clear if we look at what happens to net exports of European goods to Asia: in the counterfactual world of no precious metals existing, they increase. Historically, we know that this wasn’t the case.

As the figures suggest, our simulations show that the combined effect of the discovery of precious metals in America plus new trade routes to Asia led to Euro-Asian trade volumes that were up to 13 times what they would have otherwise been. After peaking in the second quarter of the seventeenth century the effect diminishes over time as the early modern period advances but is still over 10 times as late as 1750.

In the paper, we also consider the effect of rising incomes in Europe, and show that its effect was marginal relative to what can be attributed to the windfall of precious metals.

Early modern Euro-Asian trade started off a historical dynamic process with broad consequences for Europe. While foreign trade accounted for a small percentage of European GDP at this time, it provided dynamic expansion opportunities. Early modern trade with Asia led to the emergence of mercantile companies such as the Dutch VOC and the English East India Company, which in many ways were the prototype for modern multinationals.71 It permitted the development of modern financial markets in Amsterdam and London. It induced an industrious revolution which encouraged additional labor input and market participation in Europe, necessary preconditions for the process of modern economic growth and for the industrial revolution itself. It stimulated economic growth and urbanization, through a process of spillovers and agglomeration economies. Trading with Asia (and America), may have also induced a shift in the wealth and political power from the land-owning elite to the hands of a merchant, entrepreneurial class. Positive spillovers also resulted from the increased inter-continental exchange of ideas. Finally, international trade and war always came together, and external warfare was one of the most powerful drivers behind European state-building.